Failing Chicago State University students were awarded about $740,000 in federal and state financial aid when, if the university had been following its own policy, the students would not have been enrolled.

However, officials said the university calculated the $740,030 figure — which covered July 2007 to June 2011 and related to 126 students — before realizing that a prior administration had suspended the policy in 2008.

"That policy had been suspended, and students were allowed to continue to register," and therefore were eligible to receive the funds, said Glenn Meeks, Chicago State's vice president of administration and finance.

The issue was detailed in a state audit released last week that covered fiscal year 2011, which ended June 30.

Although the university provided a memo saying that students would not be dropped for poor scholarship after the spring 2008 semester, the audit pointed out that the undergraduate catalogs still stated that the school's academic standing policy called for dismissal for grades below a certain GPA.

Last year, university President Wayne Watson ended the practice of allowing failing students to stay enrolled, and hundreds of undergraduates were dismissed at the end of spring term 2011.

University officials acknowledged in an audit response that a smaller number of students were incorrectly awarded financial aid. The audit stated that 20 students during the four-year period were over-awarded a total of $122,852 in federal financial aid and that 13 students were over-awarded state aid totaling $20,151.

Angela Henderson, the university's vice president of enrollment management, said Chicago State has alerted theU.S. Department of Educationand the Illinois Student Assistance Commission about the problem.

"We are going through the process to return the money to those entities," Henderson said.

The Tribune first wrote about the issue in July, revealing that the university had intentionally allowed failing students to stay enrolled — in part to boost its enrollment figures and retention rates.

Students had been allowed to register for classes with GPAs as low as 0.0, even though the suspended university policy required students with a cumulative GPA below 2.0 to be placed on academic probation after one semester and then dismissed "for poor scholarship" if, after the next semester, they had below a 1.8 with less than 30 credit hours or 2.0 after 60 credit hours.

The latest audit of Chicago State found 34 problems, down from 41 the year before.

In a letter to the university community, Watson and board of trustees Chairman Gary Rozier wrote that they were pleased the number of findings decreased but said the university "still has much work and many difficult decisions to make."

"The audit directly impacts the public perception of Chicago State University and reflects on our reputation," Watson wrote. "We are committed to correcting every finding in a sustainable way."

The South Side-based public university, which serves about 7,200 students, has a history of financial mismanagement. Watson, who took over in 2009, has been making the case that the university has turned a corner and is improving.

The letter noted that departments with an audit finding were required to immediately develop corrective action plans, and workshops were held to promote a better understanding of the rules, including a "compliance month" in January.

Problems uncovered in the latest audit include sloppy bookkeeping, lax controls over contracts, making unallowable purchases with federal grants and assigning "incomplete" grades to students who didn't fill out the necessary paperwork to get that grade.

The audit also found that the university awarded federal financial aid to students taking classes at an off-site location that had not been approved, in violation of federal regulations. It doesn't specify the location, and a university spokeswoman did not respond to a request for that information.

The audit also revealed problems with some purchases.

For example, the university bought a $106,175 book drop and sorter for the new library in 2006 that was never used because of software conflicts. The university returned the item to the vendor this year for a credit of $15,000 toward future purchases.